A Reality Check for the Solar Panel Industry

by James Brumley | February 16, 2012 10:47 am

If you’ve been following the solar panel industry’s stocks this year, one thing (and only one thing) is certain right now: Nobody really knows what’s next for these companies. Oh, that hasn’t prevented a myriad of assumptions from coming out of the woodwork, but the fact is, folks are jumping to conclusions first and finding out the facts later — if they care to find them at all.

Unfortunately, I can’t list all the relevant facts in a single article. But I can give you some food for thought.

For Perspective

Despite the incredible rally we’ve seen from solar stocks this year — the Guggenheim Solar ETF (NYSE:TAN[1]) still is up 28% year-to-date even after the big pullback this week — the bulk of the outlooks remain pessimistic.

The arguments make sense on the surface, too, primarily suggesting the 2011 panel glut isn’t over yet, even though several of the solar panel race’s players have dropped out in the meantime. Energy Conversion Devices (NASDAQ:ENER[2]) is one of the most recent bankruptcies, though hardly the only one. Several smaller names like Pennsylvania’s Suntricity Power and Evergreen Solar (PINK:ESLRQ[3]) also bit the dust of late.

Why? There’s simply not enough profitable business to go around. Oh, there’s enough unprofitable business to go around, but only a select few manufacturers are able to clear a profit at the current “going price per kw” now that Chinese manufacturers allegedly are dumping selling panels at below cost just to get some cash flow going.

That’s just one of several factors in play right now, however. And therein lies the problem. There are multiple pressures pushing and pulling these stocks, and it’s nearly impossible to hit the moving target these forces are creating.

To that end, here are my expected outcomes for all the major items in questions regarding solar’s present dilemma:

Best Guesses

The Germany subsidy cuts are coming, and they will hurt. Some think the subsidy cuts will only be a 10% reduction, while others think they could be axed by 35%. That’s harsh either way, but the number gets downright scary knowing Germany is the biggest solar power consumer within the biggest solar panel market (Europe). Last year, Germany installed 7.5 gigawatts of the world’s estimated 28 gigawatts of solar power installations.

China really is going to ramp up its usage of solar, even if only to soak up its own excess. After installing only 2.2 gigawatts last year, the pros think the country is on pace to add between 3 gigawatts and 5 gigawatts this year.

The United States will install 4.4 gigawatts of solar power production capability, up from 1.8 gigawatts in 2011.

Polysilicon prices will rebound this year. It won’t be a huge rebound, but they’ll end the year better than the recent price of $28 per kilogram. As such, this aspect of the manufacturer-supply business will stabilize.

(Note that the expected installation demand this year is largely the result of low polysilicon prices, so the two are interdependent.)

The import tariff on Chinese solar panels being discussed by the Department of Commerce just isn’t likely to happen. It’s most likely just saber-rattling to prompt a heart-to-heart discussion with China regarding its alleged panel “dumping.” There’s simply too much at risk for American companies to actually pull that trigger. Case in point: The recent deal between Yingli Green Energy (NYSE:YGE[4]) and DuPont (NYSE:DD[5]), in which Yingli agreed to buy $100 million worth of solar panel manufacturing consumables. There are countless other supply deals like it that we rarely hear about.

We’ll continue to see attrition and consolidation within the solar power industry … though more attrition than consolidation. The survivors — and suitors — will be the outfits that know how to produce panels or polysilicon for less than their average selling price (which largely is a function of size and scalability).

The Truth of the Matter

Yep, a lot is going on, and those predictions aren’t even the whole story. They’re the bulk of the story, though, and if we can get our arms around those details, the rest becomes academic.

There’s one final philosophical idea that needs to be added, however …

When it’s all said and done, the truth usually is somewhere in the middle of the extreme opinions. It’s fun to dream of rebound riches for the solar group this year, and it’s fun to bash these stocks into oblivion. Far more often than not, though, actual outcomes end up being quite boring.

Translation: 2012 is most likely to end up being mediocre and uneventful for solar panel makers, now that some pricing stability is being injected.

And the Winner Is …

Based on the (boring) assumptions that (1) it’s possible to make money in the solar business, and (2) that some of these companies are better managed than others, it’s worth hunting down the best of the best.

Trina Solar (NYSE:TSL[6]) is one of them. Yes, the company swung to a loss last quarter, but that wasn’t an operational problem. It wasn’t even really a cost problem. It was mostly a revenue problem, which is alarming on the surface, but with global demand and polysilicon prices expected to improve this year, Trina Solar truly might be a case of “the worst is over.”

Yingli Green Energy is another one of them. Yes, YGE’s balance sheet is a bit of a mess — it has a ton of debt. On the flip side, it also has a ton of cash.

Like Trina, Yingli hit a snag last quarter when the top line fell but the cost of revenue went up. That’s a kink that’s being worked out now, though (somewhat deliberately, and somewhat by chance). And once the panel/polysilicon/demand equilibrium is found again, Yingli Green Energy will regain its economy of scale and get back in the black.

The Final Word

As noted above, by the time the debate gets heated, the bulk of the reason for the debate is in the past. I think that’s what’s going on with solar now — the current discussions are discussions we should have had a year ago. Now that all the cats are out of the bag and all the factors are being priced in, I suspect it’s going to be quite uninteresting, but at least mildly bullish.

There’s one more takeaway for investors, though: Current solar power investors need to really decide if they’re investors, or just traders. Being either is fine, but the dynamics being batted around right now are long-term (multi-year) ideas.

More to the point, using these long-term ideas — like more attrition, higher panel prices and reborn demand — will take at least a year to really start showing up on corporate bottom lines. If you’re willing to wait it out for that long, the recent bottom is a major entry opportunity. If you’re just a short-term trader disguised as a long-term investor, though, then the next few months are probably going to be sheer torture (with occasional bouts of bullishness) as the industry continues to stumble through a rebound.

You gotta decide which camp you’re in.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.